MTBs yields fall, rate cut looming

KARACHI: Yields on Pakistan’s market treasury bills fell at an auction on Wednesday taking comfort from bullish auction cut-offs and signaling at least 50 basis points cut in key discount rate later this month, dealers said.
The State Bank of Pakistan (SBP) sold Rs80.17 billion of six-, three-, and 12-month papers. It sold Rs34.744 billion of benchmark six-month paper at a cut-off yield of 8.1606 percent down from 8.3780 percent from the previous auction held on February 18.
The cut-off yield on the one-year market Treasury bill was set at 7.9899 percent down from 8.2947 percent and three-month papers at 8.2353 percent as against 8.3707 percent.
The central bank sold Rs34.735 billion of the one-year and Rs10.698 billion of three-month papers. It received total bids worth Rs84.551 billion against an auction target of Rs75 billion.
Dealers said there were no surprises in the auction and cut in yields on treasury bills was in line with market expectations as inflation has been clocked in at over a decade-low of 3.24 percent in February 2015. Since October 2003, February’s inflation number was the weakest reading.
They added that the bid pattern showed that six- and one-year paper were becoming more popular, as the market was expecting another rate in the coming weeks.
Banks are continuously investing in the government papers, as these investments are ‘safe havens’, they added.
Pakistan aims to cap its inflation rate at 8 percent in the current fiscal year, while the central bank sees inflation to clock at 4.5 to 5.5 percent. In the fiscal year ended June 30, inflation remained at 8.6 percent. In January 2015, inflation was recorded at 3.9 percent and 7.9 percent in February 2014.
“With the declining prospects of inflation, the auction results indicate that the central bank might cut key discount rate by 50 to 100 bps in its upcoming monetary policy due later this month,” said Khurram Schehzad, an analyst.
The expected correction in inflation and the soft global commodity prices have improved the outlook for another rate cut in the March policy meeting.
The SBP planned to auction treasury and long-term papers worth Rs1.527 trillion in March-May period to meet the government’s borrowing needs.
Analyst Muzammil Aslam at Emerging Economics Research said cut-of-yields on short-term and long-term government papers also showed that the market “is well-liquid.” “The 10-year PIBs was traded at 9.15 percent down from 9.55 percent in the secondary market following auction,” Aslam said. “As the prospects of the external inflows are high, the government seems to meet its budgetary requirement from the non-banking sources.”